Key Takeaways
- Market makers and HFT firms provide most market liquidity and profit from the spread
- High-frequency traders operate in microseconds—retail traders cannot compete on speed
- Understanding who you're trading against sets realistic expectations
The Players at the Table
Client Question: "Someone must be making money from all this trading, right?"
When your client makes a day trade, who's on the other side? Understanding the answer is crucial for setting realistic expectations. The short answer: professionals with enormous advantages.
Market Makers: The House Always Wins
Market makers are professional firms that continuously quote both buy and sell prices. They don't try to predict whether stocks will go up or down—they profit from the bid-ask spread.
| What They Do | How They Profit | Their Advantage |
|---|---|---|
| Quote bid and ask prices | Capture the spread on each trade | Guaranteed profit margin |
| Provide liquidity | Volume × spread = income | No directional risk |
| Trade with anyone | Manage inventory risk | Sophisticated algorithms |
Key insight: Market makers are playing a completely different game than day traders. They don't need to be right about direction—they just need volume.
The Dominant Players
A concentrated group of firms handles the vast majority of retail orders:
- Citadel Securities handles about 41% of US retail equity orders
- Virtu Financial handles about 26%
- G1 Execution Services handles about 16%
Together, these three firms handle over 80% of retail stock orders. They've built massive infrastructure specifically designed to trade with retail investors profitably.
High-Frequency Traders: The Speed Advantage
High-frequency trading (HFT) firms use specialized algorithms to execute trades in milliseconds or even microseconds.
Speed comparison:
- Human reaction time: ~200-300 milliseconds
- Retail broker execution: ~100-500 milliseconds
- HFT execution: 0.01-1 millisecond (10-1000x faster)
The speed wars are real: In 2012, firms spent millions laying a straighter fiber optic cable from Chicago to New Jersey just to reduce round-trip latency from 14.5 milliseconds to 12.8 milliseconds—a 1.7 millisecond advantage worth millions in profits.
HFT firms in the US now account for over 50% of total trading volume.
What HFT Firms Actually Do
| Strategy | Description | Retail Impact |
|---|---|---|
| Market Making | Provide quotes faster than anyone else | Often first to trade with you |
| Latency Arbitrage | Exploit tiny price differences across venues | May trade ahead of your order |
| Statistical Arbitrage | Find patterns too brief for humans to see | Creates additional competition |
The Information Asymmetry
Beyond speed, professional traders have informational advantages:
- Order flow visibility - When brokers sell order flow, market makers see retail trading patterns
- Faster data feeds - Exchanges offer premium data access to institutional clients
- Better analytics - Teams of PhDs and quants analyzing markets 24/7
The Uncomfortable Reality
When a retail day trader makes a trade, they're likely trading with:
- A market maker who profits regardless of direction
- An algorithm that executed before they could blink
- An institution with superior information and analysis
This doesn't mean winning is impossible—but it means the odds are structurally tilted.
Professional Framing
When clients ask about day trading, help them understand the competitive landscape:
"When you make a trade, you're competing against firms that have invested billions in technology, hire hundreds of PhDs, and can execute trades thousands of times faster than any human. That doesn't mean you can't win—but it means you're not playing on a level field. The question is: what edge do you have that they don't?"
What is the primary way that market makers earn profit?